Four ways to profit from investing in technology – Digitalmunition




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Published on September 12th, 2020 📆 | 5053 Views ⚑

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Four ways to profit from investing in technology

No one can doubt the might of US technology giant Apple. More than a billion of us are hooked on its sleek devices and there are few places in the world where its ubiquitous chomped-apple logo would not be recognised. 

But can the company really be more valuable than all of the 100 biggest UK companies combined – as its recent share price indicated? This is the question now facing investors in Apple and other tech giants. 

On the one hand, there is no question that these companies are reshaping our world. 

Cheap as chips: In recent days, shares in some tech companies have fallen sharply as nervous investors cash in their holdings

Google has a near-monopoly on internet search, Netflix has kept hundreds of millions of us entertained during lockdown, while Amazon has made shoppers come to expect that almost anything they desire can be delivered at the click of a button. 

Yet, as Apple’s share price has doubled in value in the past six months and other tech titans have seen similarly astronomical share price growth, investors have started to question whether big technology shares are now overpriced. 

In recent days, shares in some tech companies have fallen sharply as nervous investors cash in their holdings over fears these companies’ shares have become too expensive. 

So what can investors do if they still want to invest in technology, but don’t want to pay over the odds? Are there cheaper alternatives? Here, Wealth shares some ideas for getting tech on the ‘cheap’. 

START BY BUYING THE BEST OF BRITISH 

The US is the home of most tech companies and therefore many investors trawl the US market looking for opportunities. 

But if you want to find a good one flying under the radar, you might be better off looking elsewhere, says Stuart Widdowson, fund manager of investment trust Odyssean. 

He likes to find tech companies that are priced reasonably. Some of these are based in the UK, but have businesses that benefit from exposure to the lucrative US market. One such company is translation service provider SDL. 

Widdowson says: ‘Although it is a UK company, just 11 per cent of its sales are in the UK. Its biggest market by far is North America.’ 

SDL last month agreed an all-share merger with fellow British translation firm RWS. 

Will Walker-Arnott, senior investment manager at wealth manager Charles Stanley, agrees that homegrown tech companies sometimes offer investors better value. 

He says: ‘We remain supportive of the digital revolution, but we think it is worth looking closer to home for technology companies with less froth in their stock market valuations.’ 

He likes Avast Group and GB Group, both quality UK companies that specialise in cyber security. Avast Group develops and sells antivirus products. 

‘Working from home during the pandemic has meant that people are willing to spend more money ensuring that their home IT systems are secure,’ says Walker-Arnott. ‘It is an attractive business model for private equity houses and Avast remains a possible takeover target.’ When a company is bought out, its shareholders tend to profit as they are generally paid a premium for their shares. 

GB Group provides products that help organisations verify the identity of their customers. 

Anyone who has gone through the palaver and paperwork often involved in opening a bank account may appreciate the value of a company that seeks to do this seamlessly. 

The company has also developed sophisticated algorithms that can help financial institutions spot fraudulent activity. 

Investors may wonder why UK tech companies tend to be relative minnows when there are such tech whales swimming across the pond. 

Rest assured, it is no reflection of their quality. 

The UK abounds with world-class tech entrepreneurs and start-ups – the sort that no sooner do they show potential than they are bought out by bigger players. 

Some smaller company funds seek out early stage tech companies. Liontrust UK Micro Cap, which holds more than a quarter of its fund in technology companies, is one example.

SEARCH OUT STOCKS THAT GIVE STEADY GROWTH

Investors in technology companies tend to seek out businesses with potential for knock-out growth. But Widdowson believes there is a strong investment case to be made for selecting related stocks that deliver a steady, plodding growth. 

Over the years, he has found that providers of public sector software are perfect for this. He adds: ‘It is not an exciting area of tech, but can deliver reasonable business growth. He cites digital software supplier Idox as an example. 

Investors often have their heads turned by snazzy business trends – for example, companies that are disrupting the way we shop, communicate or enjoy our entertainment. But there are just as many exciting investment opportunities to be found in the businesses providing the underlying hardware supporting these global trends. 

For example, both Sharat Shroff, manager of fund Matthews Pacific Tiger, and Richard Sennitt, of Schroder Asian Income, believe semi-conductor and microchip manufacturers make good tech investments. These include Samsung and Taiwan Semiconductor Manufacturing Company. 

Sennitt also invests in Hon Hai Precision Industry, an electronic manufacturing company based in Taiwan.

LOOK FOR FIRMS THAT ARE UNDER THE RADAR 

Many tech companies have benefited from trends accelerated by Covid-19. Shares in video-conferencing company Zoom, for example, are up in value five-fold this year thanks to the increase in homeworking. But not all companies have profited and their share prices remain muted. Should there be a strong economic recovery, the share prices of some of these firms could perk up. 

Cyber security specialist NCC Group is one example cited by Widdowson. He says: ‘NCC has some talented employees, including former hackers who can work out how computer systems can be penetrated.’ 

Sales have been held back due to Covid-19, but NCC has kept its employees on its books though not working at full capacity. ‘This has been a drag on profits, but when its business market returns it will be ready to bounce back,’ adds Widdowson. 

Tracsis specialises in rail network and event transport planning. It can create more capacity on rail networks with the same amount of infrastructure – and controls traffic flows at key events such as the Silverstone Grand Prix and Glastonbury. Both brilliant offerings – until a pandemic came along and curbed both rail travel and large events. 

‘If and when the economy returns to a semblance of normality, Tracsis will be in pole position,’ says Russ Mould, investment director at wealth manager AJ Bell.

IT’S VITAL TO SPREAD THE RISK 

An easy way to spread risk is to put your money in a technology fund or investment trust. 

Polar Capital Global Technology, AXA Framlington Global Technology and Herald Investment Trust are three of many funds that seek out tech firms with potential to grow quickly. 

Investors can spread risk even further by only holding a small number of technology investments as part of a wider portfolio. Holdings of global and US equity funds are likely to have significant exposure to technology. 

There is a reason tech stocks have soared. You just have to look at how our lifestyles are changing to see it. We are shopping more online, storing information remotely, and companies are increasing their use of data. 

These trends, made possible by technology, won’t change and have all been accelerated by Covid-19. 

For those who already own tech stocks, there is likely to be value in holding on to them – while perhaps crystallising some profits. 

Darius McDermott, managing director of investment scrutineer FundCalibre, says: ‘While the environment for tech is likely to stay positive, these stocks could come off the boil.’ Yet it remains to be seen what will happen to their value if there is a strong economic recovery. 

While a recovery could see some cheap tech companies bounce back, some big players may not do so well. 

AJ Bell’s Russ Mould warns: ‘People are currently overpaying for growth stocks because there aren’t alternatives. But once there are – a result, for example, of a recovery in airlines and retail – the need for people to overpay for growth companies will be reduced.’ 

Tread carefully when jumping on the tech bandwagon.

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